If you find yourself considering both bankruptcy and divorce around the same time, it's easy to feel like your life is falling apart. But your position isn't as unusual as you might believe. While bankruptcy and divorce don't necessarily go hand in hand, they are often connected. Research indicates that debt is one of the most harmful relationship issues. And it's well-known that legal separations and divorces have a negative impact on the finances of the couple. The court costs and lawyer's fees are a big expense, and both spouses face bearing the full costs of maintaining a household on their own. Given the effects of finances on the strength of a marriage and the effects of divorce on one's finances, it's no surprise that a bankruptcy might be on the horizon before the divorce or become necessary immediately following the divorce. The question is, when you know that both a divorce and a bankruptcy are imminent, which should you file first?
When to File Bankruptcy First
It can be difficult to file for bankruptcy jointly if you're not on amicable terms with your soon-to-be-ex spouse, so your ability to cooperate with each other for some length of time should be considered. It's best not to attempt any joint bankruptcy if the relationship is highly contentious. If you're considering filing bankruptcy first, your best bet is to file for a Chapter 7 bankruptcy, which usually only takes about three or four months.
A joint Chapter 7 bankruptcy allows both of you to wipe out your unsecured debts without the need to commit to a lengthy joint repayment plan. If one of the two of you is a stay-at-home spouse or is making only a minimal amount of money, filing for bankruptcy before the divorce can help the spouse that is making the majority of the money qualify for a Chapter 7, as opposed to a Chapter 13. Separately, the spouse making the majority of the money may have too many assets to qualify for a Chapter 13, but with the addition of a non-working or minimally-earning spouse, a Chapter 7 may be an option. Many people prefer the Chapter 7 because it doesn't require you to repay your debts.
Furthermore, if neither one of you can afford to pay off an underwater car loan or mortgage, a Chapter 7 bankruptcy can wipe that out, which means that you and your spouse won't need to worry about how to split that debt up.
When to File for Divorce First
If your combined incomes are too high for the two of you to file for a Chapter 7 bankruptcy, divorcing first may bring your income and asset levels down low enough to qualify for a Chapter 7. Basically, if you want or will have to have a Chapter 13 bankruptcy, filing for divorce first is a smart move. A Chapter 13 bankruptcy repayment plan can last from 3-5 years. While you can certainly divorce while the repayment plan is in place, you will still have to follow the repayment plan jointly, and one spouse's failure to pay can affect the other's status. In most cases, it's best not to have your finances tangled up with someone that you intend to divorce.
If only one of you wishes to file for bankruptcy, divorcing first can protect the non-bankrupt spouse's assets. For example, if you're awarded the house in the divorce, and you don't plan to file for bankruptcy, having the divorce decree in place and the home title legally signed over to you protects the house from foreclosure when your ex-spouse files for bankruptcy.
Spousal support and child support are also important considerations. If you're going to file for a Chapter 13 bankruptcy and you know that you're also going to end up having to pay spousal support or child support, it's best to get the divorce over with first. That way, the child and spousal support amounts will be factored in when looking at your income and determining your repayment plan.
Both divorce and bankruptcy can have a major impact on your finances for years to come, so if you're going to have to deal with both of them, it's best to take the time to strategize with your soon-to-be-ex spouse to choose the plan that will have the least negative consequences for the both of you. Also, contact a lawyer, such as Wade Bettis, J.D., Ph.D., PC, to help you through the process.